Comparing Auction Vs Private Treaty Sale: The Experts Guide

over 4 years ago

Selling your house requires sifting through a myriad of decisions to arrive at the best solution for you.

One crucial decision a seller needs to make is the method they'll use to sell their home. There's an array of choices including a price on application, expression of interest and tender. Each has its merits but is not the most common when selling a residential property.

Auction and private treaty sales are the winners here. But which one is best? Let’s assume that as a seller you've secured the best agent in your area. The best agents achieve better prices.

Their advice as to which method to use is worth taking into consideration.

But we are going to enlist the 'brains trust', experts in the field of real estate who have demonstrated their knowledge on this topic, and see what they have to say.

Private Treaty Sale

According to Your Mortgage Magazine, a private treaty sale is:

"A standard residential property transaction is known as a Private Treaty sale. This is when you set the price you’d like your house to sell for, and your real estate agent negotiates individually with prospective buyers to achieve a sale as close to this price as possible"

Core Logic agrees "A standard residential property transaction is known as a Private Treaty sale. This is when you set the price, you’d like your house to sell for, and your agent negotiates individually with buyers to achieve a sale as close to this price as possible."

Why sell by private treaty? - the good

Realestateview.com.au lists the benefits as:

1) Less intimidating for buyers; For many potential sellers and buyers, the thought of an auction can be quite overwhelming and intimidating. For this reason, private sales/treaties can be beneficial in that sellers have more time to consider offers made by potential buyers and vice versa.

2) Urgency to sell; Private sales/treaties are suited to sellers that do not have an urgency to sell, and where they may be open to accepting different sale terms, such as an extended settlement period, sale subject to finance or subject to the sale of the buyer’s home.

3) Cost; Selling via private sale/treaty can often prove to be less expensive than an auction, as marketing campaigns for private sale properties are usually not as extensive. It is important to discuss and compare the costs to sell via auction vs private sale with your agent.

4) Privacy; As a private sale/treaty occurs through a negotiation process, it provides greater privacy and enables you to keep the specific details of the sale out of the public eye.

Core Logic validates that with:

► Greater flexibility for negotiation. A contract can be signed ‘subject to’ certain conditions such as a building inspection or finance approval.
► Flexibility regarding the length of time your home is listed for sale.

Why you shouldn't sell by private treaty - the bad

1) Cooling off period; Private sales/treaties are usually subject to a cooling off period (this period differs by state), as a result, the buyer could change their mind after contracts have been signed.

2) Sale length; Selling via a private sale/treaty method often can take more time than an auction. This is because there is no specific end date to give prospective buyers a sense of urgency. No deadline may also mean that potential purchasers may not be motivated to act as quickly.

3) Maximising the sales price; A key limitation of private sales/treaties is that the price is negotiated down compared with auctions where the bids increase. This means that the property is less likely to sell for more than the asking price.

(thanks to Realestateview.com.au)

Core Logic is on the same page:

► It may take longer to sell your home compared to an
auction campaign.
► You might need to make your home available to
prospective buyers for frequent viewings and inspections.
► It’s extremely important to get the pricing strategy
right. Pricing above market value can result in the property generating little interest.

Are you feeling that a private treaty sale may be your best option? Before you make your decision, let's see what the experts say about an auction.

Auction

Core Logic describes an auction as "An auction is when prospective buyers gather to bid on your property. The highest bidder at the end of the auction becomes the successful buyer, provided the bid matches or exceeds your reserve price."

Here are the benefits:

► An auction involves a three-pronged marketing push, as the vendor you have the opportunity to sell your property before the auction, on the day of the auction, or in the event the property is passed in, directly after auction.
► You have the ability to set a reserve price and a settlement date to suit you.
► A written marketing plan with pre-agreed appointment times enables you as the seller to arrange your life during the lead-up period.
► The auction process by its very nature creates a sense of urgency; buyers have a definite time frame in which they must act.
► The auction process encourages competitive bidding, which means there is no price barrier.
► A good option for sales involving multiple parties as it is very transparent.

The Real Estate Institute of Queensland (REIQ) believes auctions have these benefits:

An auction involves a three-pronged marketing push, as the vendor has the opportunity to sell their property before the auction, on the day of auction, or in the event the property is passed in, directly after auction.
You have the ability to set a reserve price and a settlement date to suit you.
A written marketing plan with pre-agreed appointment times enables the sellers to arrange their lives during the lead-up period.
The auction process by its very nature creates a sense of urgency; buyers have a definite time frame in which they must act.
The auction process encourages competitive bidding, which means there is no price barrier.

Convincing points; right? But there are some downfalls with an auction.

In general, auctions have a more expensive advertising campaign than private sales, with a $5,000-$10,000 average minimum budget.
If the property does not sell, the vendor is still responsible for paying the advertising costs from their own pocket.
Your agent may pressure you to dramatically reduce your reserve price during the high-pressure environment of an auction, in order to make the sale.
The auction process may not suit private people who are uncomfortable having their homes publicised across the internet and other advertising media. (according to Your Mortgage Magazine)

Core Logic agrees:

Auctions generally have a more expensive advertising campaign than private sales.

► The highest price achieved at the auction is an indication of the value that the market is prepared to pay, and this may be lower than your expectation.
► The auction process may not suit very private people if you are uncomfortable having your home publicised.

Each method has its good and bad points. But how can you get a better result using one method over the other? Here are some strategies and tips to improving your chances of selling your house for the best price.

Private treaty selling tips (according to Realestateview.com.au)

Creating interest in the property; If the timing of the sale is important to you, discuss your options with the agents you are considering engaging to sell the property.

Some options to speed up the sale may include additional advertising; setting a lower asking price; being flexible about inspection times; or making some quick cosmetic changes to the property. You may also consider selling via “expression of interest”, which calls for offers by a specific date.

Pricing your property; As the price is often negotiated down in the private sale method, it is important that you price the property slightly above the price you would like to sell the property for. By doing so you will increase your chances of reaching your asking price after the negotiation process takes place.

Auction selling tips (Realestateview.com.au)

Selecting an auctioneer; The auctioneer will play a key role in the success of your sale, particularly in a scenario where only one or two bidders turn up on the day. Ensure you see several auctioneers in action before deciding on whom to go with.

Ask them about their agency’s strategies to maximise the best price for your property, and choose an auctioneer with a proven track record in auctions and an excellent knowledge of the local area.

Setting a reserve price; Settle on a final reserve (i.e. the lowest price you are willing to accept) in the days leading up to the auction. It is important that the reserve is well planned so that you don’t end up negotiating this halfway through the auction when time, pressure and emotions are high.

It is also important that you do not disclose or discuss your reserve price with anyone except your agent/auctioneer.

Contracts; It is important to make sure you have the contract and vendor statement available well before the auction date. This way you will have everything prepared in advance, and not have to stress over these details in the days leading up to the auction.

Accepting market value; Be prepared to accept the market value on auction day, provided there has been competitive bidding between multiple bidders. Sometimes auctions achieve results lower than your expectations as a result of market conditions, and this is why you need to properly plan your reserve price.

Confused? Overwhelmed? Let's give a brief summary.

Conclusion

A private treaty sale is the most common method for a residential sale. It offers the buyer and seller the flexibility to negotiate and is usually less expensive than an auction.

But it could take longer for a sale to be secured, especially in a steady to rising market.

An auction on the other hand has a clear finishing date. The price is not public and only the highest, unconditional bidder, if accepted, will get to own the property. The property is not subject to finance and there is no cooling-off period.

Which method of sale is right for you? Well, that depends on your circumstances. If you are looking for a quick sale with an end date in mind, an auction should be your preferred choice.